Oil prices have remained steady today, with Brent futures touching its highest levels in more than three years, amid expectations of tightening supplies and increased demand over the coming months.
Brent Crude futures are up 0.03 per cent to $86.09, just below last autumn’s high of $86.74 after multiple post-lockdown rallies in the oil market.
Earlier in the session, the contract touched its highest since October 2018 at $86.71.
Meanwhile, WTI Crude has enjoyed a 0.12 per cent boost, rising to $83.92.
The performance is a consolidation of last week’s gains, after a rally last week when Brent and WTI soared by five and six per cent respectively, following frantic oil buying and supply outages.
In an investors note, Commerzbank said: “Oil prices are beginning the new week of trading up after having closed last week with their fourth weekly gain in succession. Brent is therefore nearing its October 2018 high of $86.74 per barrel. If it were to exceed this level, the price would achieve a seven-year high.”
Fears over the spread of the Omicron variant have abated, following growing evidence that spiralling cases are not leading to a comparable spike in hospitalisations across developed economies.
This has reduced previous worries of demand decreasing this year.
The UK is reportedly set to roll back its Plan B restrictions later this month, while social distancing rules are expected to be eased across continental Europe ahead of spring.
The Organization of the Petroleum Exporting Countries, Russia and its allies (OPEC +) have committed to increasing output by 400,000 barrels per day, relaxing cuts imposed when demand collapsed in 2020 at the height of the pandemic.
However, smaller producers are struggling to raise supply, with constraints over production alongside fears of pumping too much oil in case of renewed COVID-19 setbacks.
Speaking to City A.M., Craig Erlam, senior markets analyst at OANDA said: “There appears to be a variety of reasons behind the group missing its output targets. Under-investment appears to be one big driver for some of the member countries, while unexpected outages in others has weighed on production and contributed to the missed targets. It’s because of this that some are forecasting much higher oil prices for some time yet.”
This outlook was broadly shared by Investec’s head of oil and gas research, Nathan Piper.
He said: “A combination of under investment and backlogged maintenance are impacted the ability of OPEC+ to deliver. If this trend continues through 2022 then it could significantly impact actual OPEC+ spare capacity and the ability to respond to increasing demand or any supply side shocks.”
Oil giants such as Saudi Arabia seem unconcerned about oil price rises, meaning that any further pushes from the White House expand oil capacity will likely fall on death ears.
Danni Hewson, financial analyst at AJ Bell, suggested the will of oil producers appears to be “a little tenuous”.
She said: “Producers have taken a big covid kicking and they’re waking up to the fact the future won’t be one they’ll like. They have a small but significant window to make money and that’s exactly what they will seek to do.”
However, she pointed to Libyan output as a “glimmer of good news.”
While production is generally down on expectations, Libya’s total oil output is back to 1.2 million barrels per day, according to National Oil Corp.
Libyan output was about 900,000 barrels per day last week owing to a blockade of western oilfields.
Bjarne Schieldrop, chief commodities analyst at SEB has echoed the bullish sentiment put forward by both Goldman Sachs and OANDA in recent days, predicting oil prices could even reach $100 per barrel.
He said: “A confluence of events is underpinning the current very bullish oil market, including the reduced fear of Omicron, with the logic that global oil demand will revive faster and stronger in 2022 than previously assumed. The loss of supply of light sweet crudes, described as very tight with physical prices trading above the financial market in the latter part of last week, also determines the potential price.”
Meanwhile, festering geopolitical threats to supply are also boosting bullish sentiment, with Washington increasingly fearful that Russia will attack Ukraine.
Talks between Kremlin and the West last week failed to establish any breakthroughs, and Russia continues to amass over 100,000 troops near Ukraine’s border.
Europe’s gas reserves were boosted winter by a flotilla of US tanks, cutting the risk of blackouts over January.
According to Reuters, the White House has since held talks with several international energy companies on contingency plans for supplying natural gas to Europe if conflict between Russia and Ukraine disrupts Russian supplies.